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Liquidity Does Not Create Solvency
Excerpted from John Hussman's Weekly Market Comment via Jim Quinn's Burning Platform blog,
The actions of central bankers around the globe which have been driving stock prices higher are not a sign of control. They are signs of desperation. They are losing control. Their academic theories have failed. Their bosses insist they turn it up to eleven. Something is going to blow. You can feel it. John Hussman knows what will happen. Do you?
That said, it’s worth noting that the inclinations of central banks toward quantitative easing and interest rate suppression are increasingly taking on a tone of desperation in the face of accelerating economic weakness in Japan, Europe and China.
While the stated objective is to increase inflation, low inflation isn’t really the economic problem – low growth, intolerable debt burdens, and misallocated capital are at the core of global challenges here. Unfortunately, QE only misallocates capital toward more speculation and low-quality debt (primarily junk and leveraged loan issuance), without much impact on real growth. China’s move was prompted in part by a surge in bad loans to the highest level in nearly a decade. The largest European banks now have gross-leverage ratios as high as 30-to-1 (during the credit crisis, one could order the sequence of defaults accurately using this metric, with Bear Stearns, Lehman, and Fannie Mae right at the top). But liquidity does not create solvency, and with credit spreads widening, the growing desperation of monetary authorities is more a negative signal than a positive one.
This is much like what we saw in 2007-2008: when concerns about default are rising, default-free, low-interest rate money is not considered to be an inferior asset, and as a result, its increased availability does not provoke risk-seeking behavior. If we observe narrowing credit spreads and stronger uniformity in market internals, we will be able to infer a shift toward risk-seeking (and in turn, a greater likelihood that monetary easing will provoke further speculation). That won’t make stocks any cheaper, and downside risk will still need to be managed, but our immediate concerns would be less dire. At present, current market conditions and the lessons of history encourage us to be aware that very untidy market outcomes could unfold in very short order.
The upshot is this. Quantitative easing only “works” to the extent that default-free, low interest liquidity is viewed as an inferior holding. When investor psychology shifts toward increasing risk aversion – which we can reasonably measure through the uniformity or dispersion of market internals, the variation of credit spreads between risky and safe debt, and investor sponsorship as reflected in price-volume behavior – default-free, low-interest liquidity is no longer considered inferior. It’s actually desirable, so creating more of the stuff is not supportive to stock prices. We observed exactly that during the 2000-2002 and 2007-2009 plunges, which took the S&P 500 down by half in each episode, even as the Fed was easing persistently and aggressively. A shift toward increasing internal dispersion and widening credit spreads leaves risky, overvalued, overbought, overbullish markets extremely vulnerable to air-pockets, free-falls, and crashes.
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Yeah, liquidity and solvency are two separate issues, and no amount of liquidity can address an issue of insolvency.
Tell that to global central banks.
Anyone remember Zimbabwe, awash in liquidity...
DaddyO
In theory, all theories work in theory and practice
Remember Continental Illinois and PennCentral. Or even Lehman.
Liquidity deluxe, but when nobody wants your paper, it's called insolvency.
That's why nothing's been fixed.
Because in theory, liquidity is the same as solvency
One man's failed theory is another man's scapegoat.
Cui bono?
Printing money on the other hand, creates solvency.
Yes, but you can't print 'money,' you can only print 'currency.'
Alchemists have tried for centuries to print 'money' and have failed...
Print Donner..... Print Blitzier!
Ho. Ho. Ho
We now have the technology to print money without cost.
I'd like to point out that in late 2008 and up through the original QE1, the Fed made very clear (stated outright) that their policies were designed to be temporary support until conditions improved at the value of various financial assets rose again. Thus were mark-to-market rules extinguished to the same end.
You don't hear anyone talking about those policies being temporary any more. Only a question of when they'll start up QE again (implying also 0% rates forever in the same breath).
Proving, once again, there is nothing so permanent as a temporary government program.
I'd also like to point out that had the Fed allowed a natural (and almost certainly more severe) correction, we would already be through the worst of the pain by now and on a bounce-back rooting in something a lot closer to reality than the bubble machine we're running on today.
We are entering a new age, the age of abundance.
Temporary can be a very squishy word i.e. 'that's what we said but that's not what we meant".
But but, at the CONeX they DO print money, dintchya know?... In lots of 100 and 5000 ounces at the time.
Printing money on the other hand, creates solvency.
Printing money on the other hand, creates absorbency...
of failed debt...
...as long as the theory is generally accepted. Therefore.... MOAR FIATH....
In theory, everything's fixed.
finally someone who gets it. +1
On the VIX, even though we had all this bad news, the VIX keeps going down, ==> http://bit.ly/1fMcakI
It shows how the market keeps crashing up and up and up.
So I know the market is not the economy, but what does this mean?
Insolvency is invariably inevitable.
https://www.youtube.com/watch?v=iVpyx2gSYIc
The day is close when if it is not in your possession, it will soon belong to someone else.
its so obvious caveman would see it (but not the FEDs)
Adopting "fake it till you make it" as official monetary policy can do that.
Those expectations aren't gonna manage themselves!
Besides, it's really all they've got.
if it crashes that is only because that is what the fed gangsters want. there is no market, there is only the fed.
If Mugabe had a son he would look like.....
Mr. J. Yellen
Liquidity means you have a lot of dollars passing thru your wallet... ( in ) Solvency means your net worth is Negative
It's beyond "the market can remain irrational longer than you can remain solvent" for me -- I'm not sure how much longer my liver can take the punishment of this market
If there's one thing I've learned, it's that Hussman doesn't know what will happen.
He knows what will happen; he just doesn't know when it will happen, and he admits this if you actually read his pieces.
In 2200 it wont matter to me what he thought.
Bingo!!!
Hence the name of this blog. Give me information I can actually use!
The gold holders will be proven right even though the gold price may fall further .
Reason
If debt markets eventually explode with currency plunge
all asset prices might fall from lack of demand
But shares/ property will be heavily taxed and
possible difficult to liquidate ( limits could be put on cash withdrawals)
So only gold or silver type products can be
easily spit up ( so can but sell little or lot)..
without Govt control .. So in a way the access could be
unlimited in terms of value .
If the Govts debt wasn't so largely be way out
but they seem to refuse to cut tax and bring pensions to reality.
If the US does not do any more QE they could be setting themselves
up as the safe haven where Yen/Euro collapse
although maybe the Germans will not be suckered into the weak currency trap..
But for day Japanese even holding foreign currency could be
controlled / limited so gold is safest .
"easily spit up"
"wasn't so largely be way out"
"so can but sell little or lot"
Dude, we are human and use language to communicate. I don't know about your world.
some say that the photon has no mass but travels
at the speed of light, resulting in a significant
impact on mankind, seems all ridiculous to me.
Hussman's pretty smart. He doesn't belong on here with cranks like Peter Schiff and Marc Faber.
Yes, Hussman has an ethos! And his investors have paid dearly for it. Someone always gets the tab...
Timing is a tricky thing, I guess.
Here is an example of the end game of the greatest credit expansion and bubble in history. One by one all those companies borrowing like mad to buyback shares, as sales and revenues decline. Engineered earnings at any price with cheap Fed $. All looks good, until it doesn’t. Maybe a trillion dollars rolled over and over into new loans with super low rates, or all of Vegas, just like Atlantic City, will evaporate. All a mirage (pun intended). Next come the demands for bailouts, round two: "So many people will lose their jobs if you don't bail us out!" "The lenders will all fail too!"
<"...Caesars’ Creditors Claim Default on $1.25 Billion of Debt..."
I know if the fed gave me more liquidity....I woud be solvent.
Temporarily at least.
Isn't this just all a game engineered by the FED to allow TPTB who lost a load of money in 2008, to make it all back before the final implosion. I don't understand all this talk about the FED's theories and models not working. Of course they are working. The stock market is at record highs, the paper losses from 2008 have been recovered and then some, TPTB will be rapidly exiting stage left, while the FED keeps buying the S&P (so they can exit at absolute premiums) then the market crashes. TPTB come back in with gargantuan amounts of cash to pick up assets at bargain basement prices.
Now, can someone tell me what isn't working from the perspective of the FED ??????????
Next thing you'll tell us that getting high does not solve any problems!
For a long time much of the economic landscape has started to look like something out of "Alice And The Looking Glass" A bizarre and unrecognizable land, a land that is distorted and papered over by ream after ream of paper. This paper has been rolling off the printing presses of central banks all across the world in an attempt to mask reality.
Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run it is much worse off. The article below delves how what was once the "long run" or "distant future" where this might end may be getting much closer.
http://brucewilds.blogspot.com/2013/01/what-happens-after-momentum-ends_6.html
http://www.comstockfunds.com/default.aspx?act=Newsletter.aspx&category=MarketCommentary&newsletterid=1790&menugroup=Home
We, at Comstock, were shocked at the praise given to the Fed when we don’t believe the Fed rescued the U.S. from the ravages of a “liquidity trap” at all, but even more shocking to us was the response of the interviewers. We are sure that there were not many people watching on TV that understood the definition of a “liquidity trap”. Yet the economist was never asked to explain it. Hopefully, in this comment we will explain what a “liquidity trap” is, and why we don’t think the Fed avoided the “trap”. We will also explain why we think the Fed painted themselves into a corner and will have to keep rates very low, continue increasing their balance sheet, and maybe even resort to QE 4. We are skeptical that going back to the same old fashioned government subsidies used by the Fed over the past six years will work any better than they did for the past six years.
A “liquidity trap” as defined by BusinessDirectory.com, is a situation when bank cash holdings are rising and banks cannot find a sufficient number of qualified borrowers even at incredibly low rates of interest. It usually arises where people are not buying and firms are not borrowing (for inventory or plant and equipment) because economic prospects look dim, investors are not investing because expected returns from investments are low. People and businesses hold on to their cash and thus get trapped in a self-fulfilling prophecy. Wikipedia agrees that a liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Thus, if an economy enters a “liquidity trap”, further increases in the money stock will fail to lower interest rates and, therefore, fail to stimulate.
We believe that this country and many other countries across the globe are intertwined in this “liquidity trap” presently. It is clear that the Fed has tried to pump as much money as possible into the U.S., but for the past 50 years M1, M2, and M3 have grown at around 7.5% and this past year the Ms grew at 1.5%. According to the Federal Reserve figures and Moebs Service the average checking account balances have averaged about $2,000 for most of the post WW II period, but now they have grown to $3,700 in 2011, $4,400 in 2012, $5,000 in 2013, and $5,800 now.
We are clearly in the same “liquidity trap” that Japan has suffered from for the past 24 years. This is the main reason that this economic recovery from the “great recession” is so weak. We understand that the 3rd quarter GDP came in at 3.5%, but the U. S. has been growing at around 2.2% over the past 6 years. The average recovery from recessions since WWII has been closer to 5%. That is just about double the recovery rate we are experiencing today following the worst recession since the “great depression”.
There was a lot of trepidation in the U.S. stock market as investors were concerned about QE 3 ending. Many investors were worried about the ending being similar to the 12% and 14% declines that followed QE 1 and QE 2. Instead, the markets handled that fairly well, which surprised us.
Then the news came out of Japan! The Bank of Japan (BOJ), the Ministry of Finance (MOF), and the Government Pension & Insurance Fund (GPIF) decided to do even more than our Fed. The BOJ raised its goal for the monetary base to 80 tn. yen from 65 tn. yen. The central bank’s governor, Haruhiko Kuroda, stated that this was aimed at “ending Japan’s deflationary mind-set.”
This past September, the GPIF was supposed to invest in more Japanese equities (going from 12.5% to 25%), but postponed the move until year end. They surprised most global investors last Thursday by not waiting until December. They announced that they would double their positions in Japanese equities to 25%. But, they were so concerned about deflation they also raised their positions in international equities exposure from 12.5% to 25%. They raised the cash to make these investments by trimming their domestic bonds from 60% to 35%. This announcement drove up all international markets significantly this past Friday (including a 7% upward move in the Nikkei).
We suspect strongly that this outrageous surprise move will not help the Japanese market over the long term and be just as ineffective as all the other moves the Japanese made over the past 24 years. Remember, they tried our form of QE about 20 months ago with no apparent inflationary results. Their latest quarterly GDP was down about 7%. They will keep trying to offset the deflation in Japan by exporting it to their trading partners by driving down their yen in relation to their trading partners’ currencies. This is called “competitive devaluation” and we have been stuck for years on this part of our “Cycle of Deflation”(which is attached). Soon, many countries that are caught in the “Cycle” will be forced to move down the “Cycle” to “protectionism and tariffs” and then next to “beggar-thy-neighbor” (an example of this is Saudi Arabia lowering the price of oil today in an attempt to gain market share from the U.S.). They are doing this in an attempt to export their deflation.
This global deflationary environment has resulted in a Central Bank “bubble” that we believe will end badly both here and abroad! The reason for this difficult deflationary environment all over the world is explained very well in The Geneva report titled "Deleveraging, What Deleveraging?" It explains that, most believed that the 2008 crash (caused by the debt explosion) would result in deleveraging. But, instead, due mostly by government spending, worldwide debt grew rapidly. According to the report, global debt as a percentage of GDP has risen 36 percentage points since 2008, to a record 212%.
The Cycle of Deflation
http://www.comstockfunds.com/files/NLPP00000/581.pdf
Perpetual exponential growth is mathematically impossible. If there were material resources for continued economic growth globally, it would be a trivial matter to create the tokens necessary to make commerce possible. For example, governments could print debt-free money (there are many ways this trick can be achieved even under current laws in almost all countries) and sponsor public works projects to put it in the hands of people.
The problem that is being faced currently is not one of the availability of tokens, but the availability of actual resources. But pretending that the tokens are in short supply is convenient.
"...default-free, low-interest liquidity..."
... "tradition", folks ?
liquidity creates INsolvency. Free money is a bad thing.
I have been with hussman for about 3 years and am thankful i just put a little money with him. Every year his fund loses single digit percents. Even if he is right its going to take some smart manuvering to get me back to even.
I see liquidity as fixing insolvency. If I have a pile of debt that can be extinguished by dollars created out of thin air, and other people take my dollars in exchange for goods and services then liquidity cures insolvency in the micro sense. Meaning eveyone cannot be bailed out like this. We will see the debt burden being lifted from those close to the press and laid onto the ones furthest from it. Until the dollar is toast.
BTW just got my 2015 medical premium bill today. It takes 30% more dollars to extinquish that one.
The Problem for John Hussman is the Problem for ALL the "Money Managers":
Being "Right" is NOT Enough.......
It is being in the "Right Position".......
Neither he nor the others have the Skills and Knowledge Necessary to be in "Right Position:"
SELECT SHORTS and the Balance in US Bills Directly......
All he knows, like the others, is "Long", "Long" and more "Long".....That is in its Endgame....
As Bill Gross opined in his Mea Culpa Ante in April 2013.......
The Epoch Made the Men......It will ruin them when the Piper Comes Calling......